Milk prices have little bearing on dairy farmers, says ACCC

But it warns they need protections from milk processors and supermarkets.

Dairy farmers get paid the same whether milk is sold for $1 per litre or at a higher premium. But they stand to benefit from a mandatory code of conduct, the ACCC says, as it would correct a power imbalance that allows them to be taken advantage of.

Such a development would make sure dairy farmers aren't left to deal with last-minute supply chain cuts that could jeopardise their businesses, a scenario that unfolded in 2016 and set off a year-long inquiry by the Australian Competition and Consumer Commission (ACCC).

The consumer watchdog's inquiry into the dairy industry, which it describes as "the most comprehensive analysis of the sector for decades", has released an interim report which states it makes little difference to dairy farmers if customers buy private label milk or a more expensive alternative.

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Private label versus branded milk: where does the money go? Source: ACCC Read an accessible version of this infographic

"We don't think that an increase in the retail price of private label milk would necessarily benefit farmers, and that any additional profit would mainly be captured by the major supermarkets and processors," says Mick Keogh, a commissioner at the ACCC.

But the inquiry did find that farmers are on the weak end of an industry power imbalance.

"What's clear is that [milk] processors, often under pressure from supermarkets or export market competition, use their relative bargaining power to shift risks onto dairy farmers," says Keogh. "The power imbalance is evident in the nature of contracts between the processors and farmers. These involve uncertain pricing information and contract terms which deter switching."

The inquiry also found supermarkets have been passing most of the savings gleaned from the supply chain onto the customers who shop at their stores.

Dairy Connect, a lobby group for NSW dairy farmers, welcomed the findings of the interim report.

"Dairy producers languish at the bottom of a power relationship structure dominated largely by retail supermarkets and exporters and, to a lesser extent, by milk processors," says Shaughn Morgan, the chief executive of Dairy Connect.

One of the milk processors investigated by the ACCC in 2016, Fonterra, says changes have voluntarily been made already.

"We agree that change is required in our industry and have already taken positive steps in our business, many of which are in line with the various recommendations outlined in the report," the company says in a statement.

"We've simplified our contracts, signed the voluntary Dairy Industry Code of Conduct, we're providing greater transparency on the impacts of market movements into milk price and our farm price risk management offer has been in place for the past four seasons."

ACCC commissioner Keogh says the changes – including simpler contracts, improved pricing transparency and a voluntary code – are not enough.

"There's been some improvements following the introduction of the voluntary code but, in the ACCC's view, it is unlikely to fully address the issues that cause detriment in the industry in the longer term," he says. "The voluntary code is not enforceable and processors can choose to not participate or not comply, and there are no negative consequences."

The ACCC's report makes eight recommendations arising from its analysis of the industry to date. The ACCC is seeking feedback to the interim report by 31 January 2018 before releasing a final report in April 2018.